Misery Economic Theater 2011

[only_human]

Originally Posted by ewmayer

I urge readers to read the full article, which concludes with a very revealing vignette from a conference on financial law enforcement held last November in NYC – then, pray tell, tell us again with a straight face that the problem is that the SEC needs more funding.

The biggest problem as I see it are the revolving doors between regulation and the regulated. These aren't just Wall Street/SEC & DOJ, but also Aerospace/Defense Borg, Mining etc./BLM etc. No solution is apparent to me because the dynamic tensions between harnessing motivated self-interest and the controls on excess get circumvented at every turn of the turnstile.

[ewmayer]

Mish breaks down the latest monthly employments report from the BLS; one-line summary: Halfway decent on the surface, still woefully short of actually creating enough net jobs to make a dent in unemployment (or better, total-employment, since the BLS ignores you if you`ve been out of work for too long):

BLS Jobs Report: Nonfarm Payroll +192,000, Unemployment Rate 8.9%; Reflections on the Jobs Report

This was a solid jobs report, not as measured by the typical recovery, but one of the better reports we have seen for years. Moreover, 30,000 government jobs bit the dust. The higher that number, the better off we will all be. +212,000 private jobs is a good number. However, I suspect this may be as good as it gets for a while.

At the current pace, the unemployment number would ordinarily drop, but not fast. However, many of those millions who dropped out of the workforce could start looking if they think jobs may be out there. Should that happen, the unemployment rate could rise, even if the economy adds jobs at this pace. It is very questionable if this pace of jobs keeps up. I rather doubt it in fact.

Bear in mind that the unemployment rate varies in accordance with the "household survey" not the reported headline jobs number.

In the last year, the civilian population rose by 1,853,000. Yet the labor force dropped by 312,000. Those not in the labor force rose by 2,165,000.

In January alone, a whopping 319,000 people dropped out of the workforce. In February (this months' report) another 87,000 people dropped out of the labor force.

Were it not for people dropping out of the labor force, the unemployment rate would be over 11%.

My Comment: Gallup`s latest parallel survey, which chooses not to treat the long-term-unemployed and underemployed as desaparecidos is as usual, a bit more sobering than the government`s, as Mish`s "numbers behind the numbers" notes allude to:

Gallup Reports Underemployment Surges To 19.9%, February "Jobs Situation Deteriorates": As Bad As 2010

On one hand we have the Department of Truth about to tell tomorrow that NFP based on various seasonal and birth death adjustments increased by 250,000. On the other hand, we have Gallup which actually does real time polling without a procyclical propaganda bias. And Gallup does't have any good news:

"Unemployment, as measured by Gallup without seasonal adjustment, hit 10.3% in February -- up from 9.8% at the end of January. The U.S. unemployment rate is now essentially the same as the 10.4% at the end of February 2010."

And the one indicator that nobody in the mainstream media will touch with a ten foot pole:

"Underemployment, a measure that combines part-time workers wanting full-time work with those who are unemployed, surged in February to 19.9%. This resulted from the combination of a sharp 0.5-point increase since the end of January in the percentage unemployed and a 0.5-point increase in the percentage working part time but wanting full-time work. Underemployment is now higher than it was at this point a year ago (19.7%)."

My Comment: Not to worry, a Fed-and-hope-levitated stock market will surely cure all these ills.

And by way of a third view on today`s "U.S. Employment Trends" roundup, Karl Denninger comments on the dynamics of offshoring - It`s always interesting to read KD on this subject, because his attitude here make him sound like a lefty, in strak contrast to his frequent "100% concealed handgun ownership will stop crime" rants. He is at odds with Mish on the topic of offshoring as well: Mish dismisses it more or less in terms of "hey, that`s wage arbitrage in the global economy for you, buster... learn to deal with it by lowering your expectations or raising your productivity, or shut up," without seriously considering to what extent offshoring is simply a way of circumventing environmental and labor-condition standards shared by most developed economies:

Introducing the "We R Screwed" Indicator

Those who have read my work for a while know that I strongly support environmental and wage-parity tariffs. I do not consider this "protectionism", but rather leveling the playing field for those nations that corporations intentionally exploit through both near-slave labor conditions and the ability to dump pollutants into the air and water (not to mention poisoning their workers) as a means of "competing" with US workers and manufacturing. They then export their products back here and claim to be geniuses.

This is the evidence for my position.

This chart shows the annualized (that is, seasonality removed) change in employment adjusted for population change.

[EWM: The integral of the data over a given time span gives the total change in jobs relative to population over that period. The average of the data gives the annual rate of change of jobs relative to population, and this looks to be around -2,000,000 jobs/year over the past decade.]

One must always look at employment ex population changes. If you add 1 million people of working age to the population then you must subtract them out of the employed figures to figure out whether your workforce, as a percentage of the total working-age population, is growing or shrinking. This is essential since those who are not working but of working age are a huge net drain on the government and economy.

The claims that we are "net beneficiaries" of off-shoring, that H1B Visas make us "more competitive" in our corporations, and that we're "doing ok" in regard to our employment situation when one ignores the recession we just went through are proved utterly fallacious by this chart.

In point of fact even during the "boom times" of the most-recent recovery - from 2003-2007 - we managed to barely improve actual employment, and even then, only on a sporadic basis!

This came despite the allegedly-strong economy.

In short, there was no "strong economy" in point of fact. The claims were false. They were predicated on a lie - that expanding credit in fact is expanding wealth.

It isn't.

The employment base, when one looks at it ex-population, never expanded to any material degree at all even in 2000, which was the top of the market. It also never recovered any material number of jobs from 2003-2007.

We cannot recover until we address this. And we cannot address this so long as we continue to allow corporations to offshore jobs and import cheap workers on the H1B program.

We must impose tariffs that level the playing field for American production and shut off importing foreign workers who come here with subsidized educations while our graduates are coming into the workforce with six-figure debts, requiring salaries $18,000/year and more in excess of what that foreign worker can do the same job for.

My Comment: The 2 charts in this related ZeroHedge link illustrate KD`s point about the labor participation rate falling nearly continuously throughout the past decade.

Have a good weekend, all!

[ewmayer]

The NYT has a lengthy piece on that electronic black hole of mortgage recordkeeping, MERS:

MERS? It May Have Swallowed Your Loan: For more than a decade, the American real estate market resembled an overstuffed novel, which is to say, it was an engrossing piece of fiction.

Mortgage brokers hip deep in profits handed out no-doc mortgages to people with fictional incomes. Wall Street shopped bundles of those loans to investors, no matter how unappetizing the details. And federal regulators gave sleepy nods.

That world largely collapsed under the weight of its improbabilities in 2008.

But a piece of that world survives on Library Street in Reston, Va., where an obscure business, the MERS Corporation, claims to hold title to roughly half of all the home mortgages in the nation — an astonishing 60 million loans.

Never heard of MERS? That’s fine with the mortgage banking industry—as MERS is starting to overheat and sputter. If its many detractors are correct, this private corporation, with a full-time staff of fewer than 50 employees, could turn out to be a very public problem for the mortgage industry.

Judges, lawmakers, lawyers and housing experts are raising piercing questions about MERS, which stands for Mortgage Electronic Registration Systems, whose private mortgage registry has all but replaced the nation’s public land ownership records. Most questions boil down to this:

How can MERS claim title to those mortgages, and foreclose on homeowners, when it has not invested a dollar in a single loan?

And, more fundamentally: Given the evidence that many banks have cut corners and made colossal foreclosure mistakes, does anyone know who owns what or owes what to whom anymore?

My Comment: Full piece is long but worth it.


Obama Considers Tapping Oil Reserve

Obama Considers Tapping Oil Reserve: President Obama is considering opening up the nation’s strategic oil reserve as the administration grapples with how to deal with rapidly rising gas prices.

“It’s something that only has been done on very rare occasions,” Mr. Daley said on “Meet the Press” on NBC, adding, “It’s something we’re considering.”

Administration officials have sent mixed signals about the possibility of opening the reserve, which would add supply to the domestic oil market and tend to push down prices.

Energy Secretary Steven Chu said on Friday that the administration was monitoring prices, but he has been reluctant to endorse more aggressive steps.

“We don’t want to be totally reactive so that when the price goes up, everybody panics, and when it goes back down, everybody goes back to sleep,” he said.

A few days earlier, Mr. Chu said the administration was watching the situation closely, but it expected oil production that had been lost in Libya would be made up by production elsewhere.

Administration officials continue to emphasize the critical need for long-term steps to reduce oil use, like improving the fuel economy of cars and promoting battery-powered vehicles.

But recently, five Senate Democrats have called for opening the reserve, which is stored in four salt domes in Texas and Louisiana. And on Feb. 24, three House Democrats from New England, where oil is used to heat homes, wrote to Mr. Obama saying that while exporters could increase production, “they also profit from oil price spikes and therefore have little incentive to quickly respond with the increased supply needed to calm markets.”

In recent days, prices for the American benchmark crude, West Texas Intermediate, have exceeded $100 a barrel. Oil for April delivery settled at $104.42 a barrel on the New York Mercantile Exchange on Friday.

The average price for a gallon of unleaded gasoline was $3.50 on Sunday, AAA reported, up from $3.12 a month earlier. Gasoline prices routinely rise as the weather turns warmer and people drive more, leading some experts to predict gasoline at $4 a gallon this summer.

The Strategic Petroleum Reserve was established in response to the Arab oil embargo of 1973-4. It was tapped most recently in September 2008 in response to Hurricanes Gustav and Ike. At that time, the Energy Department arranged “exchanges” with oil companies whose normal supplies had been interrupted; the oil companies later made restitution in oil. The last time the government sold oil from the reserve to address supply interruptions was in 2005, after Hurricane Katrina.

Sales were also made in January 1991 to calm global markets as the United States invaded Kuwait, which had been occupied the previous year by Iraq.

The government suspended oil purchases when prices were approaching a peak in 2008, before the recession began. In that case, members of Congress argued that acquisitions for the reserve were contributing to higher prices, harming consumers.

My Comment: Oh my, this seems very akin to a subsidy for the oil companies ... nowhere does the article mention any of the kinds of things needed to keep it from being gamed in that fashion, for example:

1. If you engage in "oil loans" in order to make up for supply shortfalls, how do you ensure that recipients if the loans pass on the benefits to consumers by way of lower prices?

2. Similarly, if you instead decide to sell oil from the strategic reserve in order to lower end-user prices, how do you set the required below-market rate, and how do you ensure that recipients of the below-market prices pass on the benefits to consumers by way of lower prices?

3. Since most big oil companies are by necessity multinationals, how do you make sure that the government subsidies implied by such use of the SPR at least stay in the U.S., even if some portion thereof inevitably ends up helping the bottom line of the corporate recipients?

[cheesehead]

Originally Posted by ewmayer

My Comment: Oh my, this seems very akin to a subsidy for the oil companies ... nowhere does the article mention any of the kinds of things needed to keep it from being gamed in that fashion, for example:

1. If you engage in "oil loans" in order to make up for supply shortfalls, how do you ensure that recipients if the loans pass on the benefits to consumers by way of lower prices?

2. Similarly, if you instead decide to sell oil from the strategic reserve in order to lower end-user prices, how do you set the required below-market rate, and how do you ensure that recipients of the below-market prices pass on the benefits to consumers by way of lower prices?

3. Since most big oil companies are by necessity multinationals, how do you make sure that the government subsidies implied by such use of the SPR at least stay in the U.S., even if some portion thereof inevitably ends up helping the bottom line of the corporate recipients?

... and that's all entirely aside from what was supposed to be the reason for creating the Strategic Petroleum Reserve in the first place: a domestic emergency reserve to be used (to provide essential fuel for our military, for example) in case of another foreign embargo on U.S. imports. It isn't called the Consumer Price Stability Petroleum Reserve -- at least, not yet.

[Fusion_power]

There is nothing surprising in this statement.

Lower-wage industries -- things like retail and food preparation -- accounted for 23 percent of the jobs lost during the recession, but 49 percent of the jobs gained over the last year, a recent study (pdf) by the National Employment Law Program found. Higher-wage industries, by contrast, accounted for 40 percent of the jobs lost, but just 14 percent of the jobs gained. In other words, low paying jobs are increasing as a percentage of total jobs, while high-paying jobs are on the decline.

http://news.yahoo.com/s/yblog_theloo...es-not-so-much

DarJones

[R.D. Silverman]

Originally Posted by ewmayer

Obama Considers Tapping Oil Reserve

Obama Considers Tapping Oil Reserve: President Obama is considering opening up the nation’s strategic oil reserve as the administration grapples with how to deal with rapidly rising gas prices.

I see the rise in gas prices as a GOOD thing. Hopefully it will help force
people off SUV's and other gas guzzlers and reduce our requirment for
oil. It will help push us to move toward alternative sources.

With one proviso, however. Oil companies should be required to pay back
ALL (and I do mean ALL) extra profits in the form of taxes. By "extra"
one could use e.g. profits over and above (say) 2009 levels.

[xilman]

Originally Posted by R.D. Silverman

I see the rise in gas prices as a GOOD thing. Hopefully it will help force
people off SUV's and other gas guzzlers and reduce our requirment for
oil. It will help push us to move toward alternative sources.

With one proviso, however. Oil companies should be required to pay back
ALL (and I do mean ALL) extra profits in the form of taxes. By "extra"
one could use e.g. profits over and above (say) 2009 levels.

Hear, hear!

Paul

[ewmayer]

I would prefer the enormous cost of our oil-related military presence around the world (and amount of in-country standing forces related to being able to "project power" into those areas of the world at all times) be reflected in the price of oil. It'll never happen, but the resulting "miltary-oil-complex tax" would certainly shock people into reassessing whether driving that guzzler or heating that super-sized, poorly-insulated jiffy-built McMansion is worth it.

--------------------------

Denninger makes an interesting point in his brief review of the latest weekly jobless claims released this morning (and every Thursday):

Claims And Trade Balance: Ugh

The drop in extended benefits may be roll-offs. The regular claims look good, but we have to be careful here, because we're getting to the point now, with the length of this turndown, where people may simply not qualify even though they were laid off.

In order to qualify for a new claim you have to have a fairly significant work history and it must be unbroken. If you ran out of benefits, got a job and then got laid off again within a reasonably-short period of time it's entirely possible (and indeed likely) that you would be denied a new initial claim.

Trust is Necessary for a Stable Economy

The ZeroHedge contributor who writes under the alias "George Washington" has a nice review article on the role of trust (institutional as well as individual - the former lies the rub) in fostering a stable, productive economy:

Top Economists: Trust is Necessary for a Stable Economy ... But Trust Won't Be Restored Until We Prosecute Wall Street Fraud

Most policy makers still don't understand the urgent need to restore trust in our financial system, or the need to prosecute Wall Street executives for fraud and other criminal wrongdoing.

But top economists have been saying for well over a decade that trust is necessary for a stable economy, and that prosecuting the criminals Is necessary to restore trust.

Trust is Necessary for a Stable Economy
...
Political economist Francis Fukiyama wrote a book called Trust in 1995, arguing that the most pervasive cultural characteristic influencing a nation's prosperity and ability to compete is the level of trust or cooperative behavior based upon shared norms. He stated that the United States, like Japan and Germany, has been a high-trust society historically but that this status has eroded in recent years.

My Comment: "Eroded" is putting it very mildly indeed. Lots of good article links and commentary in the full piece.

[cheesehead]

Originally Posted by R.D. Silverman

I see the rise in gas prices as a GOOD thing. Hopefully it will help force
people off SUV's and other gas guzzlers and reduce our requirment for oil. It will help push us to move toward alternative sources.

I second that.

With one proviso, however. Oil companies should be required to pay back ALL (and I do mean ALL) extra profits in the form of taxes. By "extra" one could use e.g. profits over and above (say) 2009 levels.

... and, to be consistent, you also think the government should be required to pay windfall tax credits to the oil companies when the market "wind" blows prices the other way, correct?

When one considers the long "pipeline" through which oil travels on its way from source to consumer, one realizes that windfall profits are primarily the rise in value of inventory oil-in-transit when oil prices rise, and that when oil prices fall, the companies experience equal but opposite windfall losses -- which don't get headlines -- because their inventory of oil-in-transit has lost value due to the same market forces. That's why they're called "windfall" -- because the "profits" and "losses" produced by market-forced price changes were not due to the oil company's own decisions or competency.

Indeed, oil companies are forced to report windfall "profits" and "losses" by standard accounting methods. They are not given the opportunity to average them out over a longer run so as to separate market-forced price changes from the financial results of their own decisions and competency.

So, informed fairness requires supporting that both phases of the windfall situation be treated by the equal-but-opposite taxing principle. Otherwise, one is simply demonstrating ignorance of the oil market reality and/or prejudice against easy targets for blame-shifting.

[cheesehead]

For clarification:

Silverman was referring to an extra tax surcharge on profits deemed to be "windfall".

I'm pointing out that to be fair, this would need to be balanced by an equally extra tax credit on windfall losses.

Or, we could just leave the tax laws as they are now. Rather than applying a prejudicial "windfall" legal label, with different tax rate, to those portions of profits/losses which are due to the effect on inventory of market price changes beyond a company's control, simply tax those profits/losses the same way both they and other profits/losses are taxed now.

- - -

By the way, are there any examples in another industry of a tax surcharge (not merely the ordinary tax rate) being applied to the portion of gain, in market value of a company's inventory, due to market price changes beyond a company's control between the time the company acquires/manufactures/produces that inventory and the time it sells that inventory?

- - -

If the purpose of "windfall" tax surcharge proposals is only to punish companies for:

a) operating in an industry where their inventories are subject to changes in value because of market price changes, or

b) being big, or

c) operating in an industry which is the only one (unless I've forgotten another case) where the retail prices of its leading products are required by law to be prominently posted for any passerby to be able to read, or

d) being in the news a lot, or

for any reason not mentioned yet,

then ... please spell out the justification.

BTW, in regard to b): I am in favor of _slightly_ progressive tax rates on corporation profit, if applied uniformly across industries.

[ewmayer]

Japan Central Bank Injects Funds as Stocks Plunge: Japan's central bank injected a record 7 trillion yen ($85.5 billion) into money markets and the Tokyo stock market nosedived Monday on the first business day since an earthquake and tsunami devastated the country's northeast and raised dire worries about the economy.

The benchmark Nikkei 225 stock average fell 487 points, or 4.8 percent, to 9,767.18. Worries about the economic impact of the disaster triggered a broad sell-off that hit all sectors.

The Bank of Japan moved quickly to try to keep financial markets stable. By flooding the banking system with cash, it hopes banks will continue lending money and meet the likely surge in demand for post-earthquake funds.

Immediately after the earthquake, the central bank pledged to "do its utmost," including providing liquidity. A one-day policy meeting was scheduled for later Monday.

Preliminary estimates put repair costs from the earthquake and tsunami in the tens of billions of dollars — a huge blow for an economy that lost its place as the world's No. 2 to China last year, and was already in a fragile state.

Japan's economy has been ailing for 20 years, barely managing to eke out weak growth between slowdowns, saddled by a massive public debt that, at 200 percent of gross domestic product, is the biggest among industrialized nations.

"In the short term, the market will almost surely suffer and stocks will plunge. People might see an already weakened Japan, overshadowed by a growing China, getting dealt the finishing blow from this quake," said Koetsu Aizawa, economics professor at Saitama University.

The nation's big-three automakers, meanwhile, said they would halt all production in Japan due to widespread damage to both suppliers and transport networks in the region.

The Bank of Japan pledged to pump more money into financial markets when it holds a policy board meeting Monday. There is not much left for the central bank to do regarding interest rates, which are already close to zero.

Tens of billions of dollars are expected to be needed to rebuild homes, roads and other infrastructure — requiring public spending that will add to the national debt.

"The impact on Japan's economy will be devastating," said Sheila Smith, senior fellow for Japan Studies at the Council on Foreign Relations, a New York-based think tank. "The long-term economic blow to a country already struggling to lower its budget deficit ... will be significant."

Noting the 1995 earthquake in Kobe cost $132 billion and was the world's most expensive natural disaster, she said it was too early to say whether the losses from Friday's disaster would be on that massive a scale.

My Comment: I am 100% certain the cost of the current disaster will far exceed that of the Kobe quake when all is said and done, though that could stretch over several decades - think how long it will take to decommission/contain the ruined nuclear reactors and replace the resulting loss of generating capacity. That alone will cost $tens of billions, perhaps on the order of $100 Bln if a significant fraction of Japan's nuclear reactors - including ones not seriously damaged in the present instance but at similar risk - need to be decommissioned and replaced.

Mish explains the seeming paradox of why the Yen is strengthening in the wake of the crisis and the government's ensuing flood of money-printing, as well as debunking the idea (promoted by some the usual Keynesian stimulus advocates) that this disaster will have the silver lining of being "economically stimulative" here.

[Update: I composed the above last night, but forgot to click 'submit' after previewing ... anyway, the Yen did initially spike higher but then sold off.]

And speaking of Keynesian nonsense, so far the Ayatollah of Keynesianism, The NYT Paul Krugman has only noted that reassuringly - and somehow "in defiance of the fiscal hawks" Japanese government bond interest rates have fallen rather risen on the central banks' money injection. Well, I expect one of the main ways the central bank is injecting new-printed capital into the banking system is by buying previously-issued government debt from the banks, which of course will tend to drive down interest rates.

[And even if the initial "tsunami of liquidity" does not involve bond buying, there are surely market expectations of such].